As investment vehicles, stocks and cryptocurrencies share a few similarities. Both have skyrocketed in terms of value in recent years, and both offer potential for financial gain. It’s a misconception, however, to think that one can stand in for another and vice versa.
For starters, the very natures of stocks and cryptocurrencies are different, and so are the regulatory frameworks that guide their use. So while it’s true that cryptocurrencies and stocks provide opportunities for individuals to grow their wealth, they do so through different mechanisms.
Cryptocurrencies and Stocks in a Nutshell
To get the gist of cryptocurrencies, it’s important to understand what a blockchain is. Blockchains, simply put, refer to decentralized ledgers that are maintained and distributed in a network of computers. This technology enables the existence of digital coins that secure transactions through the use of cryptography.
Cryptocurrencies are not issued or regulated by any central authority, and this offers the users of these digital coins potentially borderless means of exchange. People who own digital coins have a way to exercise a greater level of control over their funds. They also have an opportunity to reduce their reliance on traditional financial intermediaries like banks, insurance companies, and loan and savings associations. If you want to purchase a Bitcoin investment, for instance, you have the option to transact directly with other coin owners or use intermediaries like exchanges or brokers to complete the task.
Stocks, on the other hand, represent ownership in publicly traded companies. Investing in a company’s stocks means that you are buying shares that entitle you to a portion of the company’s ownership as well as its potential profits. The value of a company’s stock is dependent on several factors, most notably, the financial performance of the company and the current direction of the economy. Trading stocks is a highly regulated activity that is typically overseen by government agencies such as the Securities and Exchange Commission (SEC).
5 Key Differences Between Cryptocurrencies and Stocks
It’s a good idea for would-be investors to understand the difference between cryptocurrencies and stocks before they put their money on either investment avenue. Here are some of their most notable dissimilarities.
Regulations
Cryptocurrencies operate in a relatively unregulated space. Regulations for trading cryptocurrencies vary per country, and there are places where the law cannot catch up with the practical applications of the technology. Clearly, the regulatory landscape for cryptocurrencies is still evolving. At the same time, due to the lack of regulations, cryptocurrencies can be considered inherently volatile and investing in them can be risky.
Stocks, as mentioned before, are subject to strict regulations enforced by government agencies. To issue stocks, companies have to adhere to disclosure requirements, financial reporting standards, and other prerequisites that are designed to protect investors and ensure fair market practices. Because there is regulatory oversight, the stock market is deemed as transparent and relatively stable.
Value Determination
There are several factors that impact the value of cryptocurrencies, the biggest of which are market demand, rate of adoption, and the opinion of the coins investors and user base. Aside from these, the valuation can also be affected by advancements in technology, regulatory changes, market trends, and even media coverage.
If a country starts accepting digital coins to complete transactions, for instance, then it can significantly drive up the price of a coin. If a government starts cracking down on coin users, then the value of the currency can plummet. Speculative trading, which is trading with high levels of risk for high potential rewards, is also a factor. This activity attracts many crypto traders and can drive high volatility and rapid price fluctuations in the crypto market.
In contrast, the value of stocks is mainly derived from the financial performance and prospects of the particular company that issued the stocks. Still, factors such as revenue, earnings, growth potential, industry trends, and overall market conditions can influence stock prices. To assess the present and future value of the stocks of a company, it’s a must to analyze company fundamentals, industry dynamics, and other economic indicators. In general, though, the value of stocks are comparably more stable than that of cryptocurrency.
Ownership and Rights
Since cryptocurrencies are digital coins and therefore have no physical form, they’re not exactly owned in a traditional way. To own a cryptocurrency means to be in possession of a digital wallet that has cryptographic keys. These keys, in turn, grant the owner access to the funds on the blockchain. Now, privacy is a big component of many digital coins. It’s not unusual for cryptocurrency owners, then, to remain anonymous.
It’s worth noting that while cryptocurrencies provide ownership and control over digital assets, they do not grant any direct legal rights or privileges within a specific organization or governance structure. So even if a person owns a significant portion of a digital coin in circulation, for example, this doesn’t mean that they get special privileges within the group that uses that particular coin.
Meanwhile, owning stocks represents ownership in a particular company. Shareholders have certain rights and privileges, including voting rights on significant company decisions like board member elections and major policy changes. They can also receive dividends if the company decides to distribute a portion of the profits to its shareholders. Additionally, people who buy a company’s stocks can participate in the company’s growth and benefit from capital appreciation.
Dividends and Profits
Typically, cryptocurrency investors profit by relying on capital appreciation. They buy coins at low prices and sell them to realize their profits. But since the cryptocurrency market is highly volatile, it’s still very likely for cryptocurrency investors to suffer losses due to their investments.
Stocks, as discussed earlier, provide potential income streams in the form of dividends. This happens when a company opts to distribute a portion of its profits to shareholders. It’s also possible for shareholders to sell their stocks at a higher price than the purchase price to collect a profit.
Market Accessibility
Transacting in cryptocurrencies gives participants the means to complete their purchases and exchanges without needing traditional intermediaries. The coin they own can be bought, sold, and traded as long as the person they are transacting with is willing to accept the said currency. At the same time, they can also use globally present cryptocurrency markets that operate 24/7.
Meanwhile, investing in stocks typically requires the use of a brokerage account. The exchanges provide a platform for buying and selling stocks, but investors are only able to use their services during specific trading hours. While it’s true that stock markets have become more accessible in recent years, they still involve more traditional intermediaries and regulatory requirements compared to cryptocurrencies.
It’s important for everyday consumers to understand these differences as they consider their investment options in cryptocurrencies and stocks. By comprehending the distinctions of these two investment avenues, individuals can make more informed decisions and navigate the unique risks and opportunities associated with each type.
